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Only about 12% of family-owned businesses make it to a third generation still under family control, according to a new Goldman Sachs playbook aimed at the founders and dynasties the bank counts among its most prized clients. It\u2019s a statistic Goldman itself put in print in \u201cHonoring Legacy and Positioning for the Future,\u201d a paper shaped by senior leaders across its Investment Banking and Private Wealth Management divisions.<\/p>\n
To dig into the thinking behind it, Fortune put a series of questions to Fran\u00e7ois-Xavier de Mallmann, chairman of Goldman Sachs\u2019 Investment Banking division and chairman of Goldman Sachs EMEA \u2014 the banker steering Goldman\u2019s relationships with many of the world\u2019s largest family-controlled enterprises. His answers, lightly edited for length, get at something the playbook\u2019s five-question framework can\u2019t fully capture on its own: that the biggest threat to a family business isn\u2019t usually a missing legal document. It\u2019s optimism.<\/p>\n
Your paper says only 12% of family businesses make it to a third generation. Why is the success rate still so low?<\/p>\n
Founder and family-controlled companies are major\u00a0contributors to the global economy. Decisions around succession and ownership are among the most consequential they will make, and both have a significant impact on the business and the family. \u00a0Goldman Sachs has a dedicated effort\u00a0focused on serving\u00a0family-owned\u00a0businesses and founders around the world,\u00a0working across our\u00a0Global Banking & Markets and Asset & Wealth Management divisions.\u00a0<\/p>\n
The statistic is striking\u2014but whether it\u2019s considered \u201clow\u201d or not depends on\u00a0how you\u00a0define\u00a0success.\u00a0The real questions\u00a0are\u00a0whether or not the business is flourishing\u00a0and whether the decisions made along the way have positioned both the company and family for long-term success. \u00a0<\/p>\n
In general,\u00a0family-controlled\u00a0companies tend to outperform non-family-controlled\u00a0companies over a long period of\u00a0time, but\u00a0maintaining that control across multiple generations becomes\u00a0increasingly complex with the passage of time.\u00a0In the first generation, the family and business interests\u00a0tend to largely overlap. Over time, those interests can diverge as the business grows, the shareholder base expands, and the priorities of individual family members evolve.\u00a0Recognizing those differing, and potentially competing, interests\u2014and being deliberate about how they are balanced\u2014is important given their significance for the underlying businesses.\u00a0<\/p>\n
So,\u00a0if you take a step back, by the third generation it is a lower percentage of the total number of companies that are still family-owned. But\u00a0that doesn\u2019t necessarily mean the other 88% have failed. \u00a0Some companies greatly benefit from remaining in family\u00a0shareholders\u2019\u00a0hands for a long period of time, while others benefit from evolving their ownership structure.\u00a0There are often needs to consolidate, scale,\u00a0access new pools of capital or bring in outside\u00a0expertise,\u00a0which\u00a0can require a family to cede some degree\u00a0of company control.\u00a0In those cases, changing the ownership structure may actually be what best protects the long-term value of the enterprise the family created.<\/p>\n
Beyond the business interests, you also have the\u00a0interests of the\u00a0family\u00a0itself.\u00a0There isn\u2019t always a third generation who is interested\u2014or best positioned\u2014to\u00a0operate\u00a0the business\u00a0day-to-day.\u00a0As families grow and increase in complexity over time, different members often also have varying objectives around liquidity. Successful stewardship therefore requires not only thinking about who runs the business, but what structure best positions it for the next chapter.<\/p>\n
With all these factors, it really is a case-by-case scenario for businesses that continue to operate under family control beyond a few generations. And while each situation is unique, there is a large base of precedents to learn from as one considers these decisions.<\/p>\n
You write that most succession plans are informal even when family businesses know the stakes. What\u2019s actually stopping founders from formalizing a plan \u2014 is it denial, or is it strategic?<\/p>\n
Most founders are laser-focused on running and\u00a0growing\u00a0their business.\u00a0Particularly in the first generation, the immediate needs of the company tend to take precedence over designing the ownership and governance structure it may need years, or even decades, down the line.<\/p>\n
Formalizing succession plans requires founders and families to make a series of highly consequential decisions: who should lead the company; what roles should individual family members play; how should ownership evolve over time, and when will a transition ultimately occur. Those questions take time to work through\u2014particularly when the needs of the business and family are constantly evolving. \u00a0Many believe that giving it more time and waiting will provide more visibility and information for the decisions to be made. In my experience, starting these conversations early gives families more time on priorities and a structure that can evolve alongside the business.<\/p>\n
So, it isn\u2019t a particular lack of interest, but more often\u00a0a set of priorities at a given point in time and the desire versus need to have to make some of these consequential decisions.<\/p>\n
You advise families on separating economic interests from voting rights. How often does a founder actually agree to give up voting control before they die?<\/p>\n
There is a wide range of\u00a0theses\u00a0on this\u00a0topic.<\/p>\n
Some\u00a0founders\u00a0choose to sell during their lifetime because they think\u00a0it\u2019s\u00a0in the best interest of the business or family to\u00a0do so.\u00a0Others\u00a0retain voting control during their lifetime but plan carefully for how those rights will pass once they are no longer alive. Some decide to distribute ownership equally among members of the next generation; others believe that whilst the economics can be shared equally, voting power should remain concentrated. \u00a0And, of course, some are more reluctant to make those decisions in advance.<\/p>\n
There are many precedents showing that distributing ownership equally among family members over multiple generations only allows the family to retain and exercise collective control if paired with strong governance. Those who have done it successfully typically have very structured governance, including at the family level, to facilitate decision-making. There are also visible examples of situations where the founder chooses one family member to lead and exercise control, which can be in the best interest of the business and the family\u2019s long-term economic position, but can and often does create significant stress within a family group.<\/p>\n
In general, thoughtful\u00a0long-term\u00a0owners tend to plan for\u00a0what\u00a0happens to their voting rights after they\u00a0pass.\u00a0<\/p>\n
Your playbook treats private equity and outside capital as tools for preserving family control. But is that a contradiction, considering private equity\u2019s business model is geared toward an exit?<\/p>\n
You will notice a trend here: these are nuanced decisions.\u00a0In the context of what is best for the business, many founders have to consider whether they need external\u00a0capital,\u00a0and when\u00a0they need it.\u00a0They have to\u00a0weigh the needs of the business against their desire to preserve family\u00a0ownership,\u00a0recognizing\u00a0that supporting the company\u2019s growth can sometimes mean bringing in external capital even if it dilutes the family\u2019s control.<\/p>\n
To the extent they bring in external equity, that has a certain lifespan; over time, either the family can buy it back, or it can be sold to a different investor or investor group in either the private or the public market.\u00a0The family doesn\u2019t\u00a0necessarily have to give up control to do this.<\/p>\n
If you had to bet, what percentage of the family businesses Goldman currently advises will still be family-controlled in 20 years?<\/p>\n
The drivers of whether or not a company stays in the family are, first, does the family have the talent pool and desire to continue to manage the business, and second, as the family gets larger, is there a desire to continue to work together as a family unit to run the business. Some families see tremendous benefit from doing so, and others determine that it is\u00a0in the best interest of the family not to do so and would rather have liquidity. Sometimes you also see an entrepreneurial spirit, and the capital\u00a0earned\u00a0from that core family business goes on to fund new endeavors for the family members.<\/p>\n
At the end of the\u00a0day,\u00a0we don\u2019t take a view on which will or won\u2019t be family-controlled over time because it is very specific to the family.\u00a0We help families assess what is best for\u00a0their\u00a0business\u00a0and their\u00a0family. They come to us because we\u00a0are very rigorous\u00a0about catering to the\u00a0interests of each, and we have access to an enormous experience base, allowing us to assess some of these decisions and highlight some of their potential consequences. \u00a0 \u00a0<\/p>\n
Is there a family business you\u2019ve advised where you privately think the succession plan is going to fail \u2014 and would you ever tell them that?<\/p>\n
It\u2019s a good question.\u00a0As a family wrestles with\u00a0succession\u00a0plans, we press on two\u00a0factors: Does\u00a0the family have a talent pool that is both willing and able to engage in the family business and successfully\u00a0lead it into\u00a0the future?\u00a0These are not easy things to\u00a0do,\u00a0so being willing and able is very important. We also challenge\u00a0families to think carefully about how they\u00a0define control and how\u00a0the governance\u00a0around that\u00a0control\u00a0actually works. We make it clear that as a family gets bigger, more structure is needed.<\/p>\n
And yes, part of our role is to raise difficult questions when we see potential challenges with a succession plan.\u00a0These are business\u00a0decisions,\u00a0but they are also personal decisions.\u00a0Our job isn\u2019t to tell a family that its plan will \u201csucceed\u201d or \u201cfail\u201d, but to\u00a0come to the table with\u00a0fact-based\u00a0questions and\u00a0challenge assumptions when appropriate\u00a0to help the family reach the best decision for them.<\/p>\n
Goldman makes money whether a family stays private or eventually sells. Does that shape which outcome you actually recommend, even subtly?<\/p>\n
Absolutely not. We take a\u00a0long-term\u00a0view on these\u00a0relationships,\u00a0and we help entrepreneurs and families assess\u00a0their\u00a0objectives\u00a0and determine the best path to achieve them.\u00a0We often advise against transacting\u00a0when we believe it\u2019s the best decision for the families and businesses. \u00a0
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Our role is to provide the best advice to our clients so they can succeed\u2014whether that ultimately leads to a transaction or not. \u00a0Anything else would be counter to the best interests of our clients and\u00a0shortsighted\u00a0of our\u00a0longer-term\u00a0relationships with them.<\/p>\n
What\u2019s the one question in your own \u201cfive foundational questions\u201d framework that families are most likely to answer dishonestly \u2014 even to themselves?<\/p>\n
These are very personal\u00a0decisions,\u00a0so our job is to provide independent advice, backed by a lot of experience, as input into their decision-making.\u00a0<\/p>\n
You have to ask yourself, is the founder\u00a0potentially\u00a0biased\u00a0on\u00a0his or her\u00a0family\u2019s\u00a0ability to take on the responsibilities of the business and\/or to get along with each other in the future?<\/p>\n
It is like any family; many founders believe that all members will get along for generations to come and can underestimate how quickly circumstances can change, or the challenges involved in having a larger group rather than one person sitting at the shareholder table.\u00a0<\/p>\n
It is less about dishonesty and more about the optimism anyone has for the future dynamics of their family.\u00a0<\/p>\n
#family #businesses #stay #family #Goldman #chairman #optimism #reason<\/p>\n","protected":false},"excerpt":{"rendered":"
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